Wall Street is racing toward tokenized stocks and 24/7 trading, but many institutional investors are wary of instant settlement models.
Tokenization refers to the representation of traditional assets, such as stocks, on a blockchain network. In theory, this approach could modernize decades-old market infrastructure, allowing securities to be moved and settled instantly while potentially enabling 24/7 trading.
That vision has gained strength in recent months. ICE, the owner of the New York Stock Exchange, and Nasdaq have both recently announced massive partnerships with local cryptocurrency exchanges aimed at bringing tokenized shares to market.
But for many institutional traders, the shift raises real concerns about liquidity, funding and how markets operate on a day-to-day basis.
“Institutional investors generally don’t like instant settlement,” said Reid Noch, vice president of U.S. equity market structuring at TD Securities. He said that while the technology could streamline the back end of the market, forcing trades to settle immediately would create new frictions for professional investors.
The current stock trading system in the United States is settlement on one working day after the stock transaction is executed, which is called T+1 settlement. This delay allows brokers and trading firms to net positions and manage funds throughout the day. In contrast, instant settlement requires a transaction to be fully funded before it occurs.
“No one really wants to be funded up front,” Noak said. If instant settlement becomes the standard across markets, trading firms will need to arrange financing throughout the day, potentially increasing costs and reducing liquidity at critical times.
This effect may be particularly noticeable during periods of high activity, such as market closes when a large number of trades are executed simultaneously. Balance sheet constraints may make these periods more costly for investors, making liquidity more unevenly distributed across the trading day.
However, retail traders may be quicker to embrace tokenized markets. Many of the proposed benefits – such as holding stocks directly in digital wallets or trading outside traditional market hours – are aimed at individual investors rather than large institutions.
Retail already accounts for about 20% of U.S. stock trading volume, although that can rise to more than half of daily trading volume in some stocks. In highly speculative “meme stocks”, retail investor participation sometimes exceeds 90%.
Notch said tokenized trading venues could be particularly attractive to international retail investors seeking to invest in U.S. stocks when U.S. markets are closed. For these investors, opening an account with a cryptocurrency platform may be easier than meeting the requirements of a traditional broker.
Over time, if liquidity moves to tokenized venues, institutional investors may follow. “If retail mobility moves there and makes sense, institutions will have no choice but to participate,” Noch said.
Still, this shift comes with risks. One concern is that if multiple versions of the same stock exist on different blockchains or tokenization platforms, the market will become fragmented. That could undermine the transparency and price discovery that underpins U.S. stocks.
“Typically, most companies only have one stock,” Notch said. “If multiple tokenized versions suddenly emerged with different rights or liquidity profiles, it could cause confusion over what assets investors actually own.”
Despite these concerns, industry momentum is building. Exchanges are already exploring longer trading hours, with some proposing near-round-the-clock market trading within the next few years.
Tokenization could ultimately be part of that shift—modernizing the infrastructure behind the scenes while gradually reshaping how investors acquire shares. But for now, the technology is likely to advance faster among retail traders than the institutions that dominate today’s market.
